The Automotive Industry Then and Now: A Case for Aligned Incentives

Even though the U.S. presidential election is over, historians will be evaluating the role that the automotive industry played in its outcome for years. An equal share of economists’ attention will be given to how the U.S. government bailouts contributed to what appears to be a fragile but more optimistic future for the auto corporations who received them. It is a shame that Alfred Chandler, the Harvard historian credited for a massive and influential body of research on the organization of giant corporations, passed away in 2007. No doubt he would have had some provocative thoughts on these latest developments, as much of his work focused on the automotive industry.

Chandler introduced us to some compelling organization and supply chain design lessons. His overarching legacy now seems self-evident for contemporary organization design: First, structure must follow strategy. Second, there is an appropriate place for both centralization and decentralization in large enterprises. He also taught us how to critically review the benefits and risks of integration and disintegration in extended supply chains. As the U.S. auto industry emerges from its low point, auto executives are asking questions at the heart of Chandler’s work: How do we deal with an interconnected supply chain, shifting global demand, and technological uncertainty—at a time when tough restructuring choices have severely impacted the organization? Chandler believed that “the visible hand” of managerial governance was essential for just such complexity. Jay Galbraith developed the Star Model for what is essentially “the visible hand” more than 35 years ago, which emphasizes the need to align all organizational levers with the business strategy.

Among other insights, the authors conclude that aligned incentives are important for achieving supply chain objectives,but asset ownership is neither necessary nor sufficient for this. One example cited takes us back to automotive industry history. Toyota invested in mechanisms for extensive managerial collaboration with financially independent suppliers, while General Motors vertically integrated with a few key suppliers, and then let these internal managerial mechanisms atrophy. In other words, Toyota had more managerial coordination with independent suppliers than General Motors had with wholly-owned business units. The article goes on to highlight the advantages Toyota gained by sharing resources (suppliers) with other, interdependent industry players.

Why is this relevant today? In organization design, we often hear the lament, “If I owned the resource, the partnership would be much more productive.” After decades of evidence that say otherwise, many still assume that structure (especially dedicated structure) trumps strategy, people practices, process and rewards/incentives. In Aligning Reward Systems in Organization Design: How to Activate the Orphan Star Point, http://kateskesler.com/aligning-reward-systems-in-organization-design/Greg Kesler and Michael Schuster argue that misaligned metrics and reward systems alone can derail a new strategy and organization design.

Chandler might have advised the big three automakers to take a hard look at aligning powerful incentives and rewards to drive new behaviors. The tasks at hand are daunting: Innovation will require sophisticated collaboration across the enterprise. The UAW labor agreement is new and untested. A compelling engagement strategy is critical for addressing the talent flight out of the auto industry. Regardless of the end result, no doubt, historians and economists are busy writing the next chapter.